I might be missing the point but it seems to me as though markets are finally beginning to looking at the Greece default issue in terms of how, rather than if. That it is and remains bust is pretty clear and that it will run out of money sooner rather than later is also as good as given. Where the sands are shifting is in the sphere of whether a default must necessarily lead to it being evicted from the single currency bloc.
Some years back I mused on whether, were California to default, it would necessarily need to give up the greenback. As I could see no reason for that, I wondered why the eurozone had felt the need to make such a binary rod for its own back with respect to Athens. Now, with a Grexit proving to be more than just a theoretical outcome being bandied about by a bunch of teenage scribblers employed by nasty, euro-phobic London bankers, Brussels is rapidly back-peddling as fiscal reality steadfastly refuses to cease challenging that oft quoted political will.
Key markets in Europe were closed yesterday for the Whit Monday holiday but the ones that weren’t didn’t have a great time. The blithe assumption that a solution to Greece will be found is becoming progressively less blithe. Prime Minister Tsipras might be making all the right noises and he might even have won a victory in parliament over his own stubborn anti-negotiation left-wing splinter group but the comment by Interior Minister, Nikolaos Voutsis, in which he quite frankly admitted that the money will run out in June, said it all.
The Americans are beginning to get more vocal as they push Brussels to assure that the impending default is avoided at all cost. Spending other people’s money is always easier than spending one’s own but that is a matter for another day.
What our markets need to ask themselves is: 1) Can and will the Greeks be allowed to default, and 2) Is it the end of the world as we know it if they do?
The markets are trading a no and a yes but I actually think it should be a yes and a no. In other words, a sharp asset price collapse in the event of Greece’s going under might well be the greatest buying opportunity since the same happened to Lehman Brothers after which key equity indices found themselves at around a third of where they are now. Both the Dax and the S&P have returned over 20% annually since the dark days of March 2009.
I cannot see, of course, a complete repeat of the phenomenal, rate-driven rally we have enjoyed over the past six years and I wouldn’t aggressively buy the first dip but I would, on a sharp sell-off, start scaling in. As we observed post-Lehman, investors were surprised to find that the sun still rises in the East and, still in the morning, people continue to go to work, earn money and consume. Remember that in a society with 10% unemployment, 90% of the population is still working, creating wealth and consuming.
The real global threat
That said, I was happy to find that Andrey Wilson, chief executive of Goldman Sachs Asset Management, EMEA, has joined me in finding that the massive public sector debt piles which are building up across the world pose the greatest threat to global growth. His observation is that “The demographics in most major economies – including the US, in Europe and Japan - are a major issue – and present us with the question of how we are going to pay down the huge debt burden. With life expectancy increasing rapidly, we no longer have the young, working populations required to sustain a debt-driven economic model in the same way as we’ve managed to do in the past.” 100 points to Gryffindor.
I wrote an article for this week’s print copy of IFR (but still to be found on the website) which was published on Friday which argues that debt bridges the gap between economic reality and popular expectations. If we can’t raise output any further, then we will necessarily need to manage expectations back down again. Syriza was elected on the back of its steadfast refusal to grasp that and thus to convey such a reality check to the people.
Now we have Podemos, another “anti-austerity” party registering huge electoral gains in local elections in Spain. With full parliamentary elections later on this year, as the 1936 Irving Berlin song says “There could be trouble ahead….” except that, in the song, the protagonists then go on to “…face the music and dance”. I fear that in European electoral politics, the dancing will continue to take place without the music having been faced.
Regulating to liquidity
Meanwhile, one conference after another, one article after another, one IMF or central bank study after another warns of the risk of an asset price crash being triggered by the lack of liquidity in markets, only to be met by regulators and politicians assuring us that transparency creates liquidity and that the more transparent that they can make markets, the more liquid they will become. You know that’s nonsense, I know that’s nonsense, the IMF and the central banks know that to be nonsense, but the same people who have spent years trying to borrow us into prosperity are now convinced that they can regulate us into liquidity.
An interesting week ahead on the statistics front with Durable Goods orders due in the US along with Case Shiller house prices, the seasonally adjusted reading of Q1 GDP along with more or less anything else you might care to look at. I do, however, think that the dynamics driving markets are still other than purely hopping from one release to the next. Poor volumes set to persist.
